About the company:
The biggest IPO in the Indian History is all set to hit the market. The company is leading the fintech wave in India. The IPO that we will be discussing today is One97 Communications or as we all know it Paytm.
• Issue Size: Rs.18,300 Cr
• Issue Details: Fresh Issue- Rs. 8,300 Cr, Offer for Sales- Rs. 10,000 Cr
• Issue Period: 8th Nov’2021- 10th Nov’2021
• Price Band: Rs. 2,080 - 2,150 per share
• Market Lot: 6 Shares
• Minimum Amount: Rs 12,900
Objects of the offer:
• Growing and strengthening the Paytm ecosystem
• Investing in new business initiatives, acquisitions and strategic partnerships
• General Corporate Purposes
Launched in 2009, as a “mobile-first” digital payments platform to enable cashless payments for Indians, Paytm is now India’s leading digital ecosystem for consumers and merchants. The company offered its services to 337 million registered consumers and over 22 million registered merchants, as of June 30, 2021.
Products & Services:
Through the Paytm’s Super App, the company offers payment services, financial services and commerce and cloud services. The payments ecosystem covers payments such as wallet/UPI, FASTag, bill payments, money transfers, and mobile top-ups. Consumers can make payments through Paytm Payment Instruments on the Paytm app. It also offers online and offline merchant acquisitions such as QR / smart PoS / payment gateway services and charges a take-rate on the transaction processed.
On the financial services front, the company offers mobile banking, lending, insurance, and wealth management for consumers and merchants. It also provides consumer credit - credit cards, personal loans, Buy Now Pay Later. Paytm also provides insurance products, such as auto, life, and health. Moreover, it extends attachment products such as movie and travel ticket cancellation protection. The company also offers wealth management services through the Paytm app and the Paytm Money app. Moreover, it launched a discount broking business in 2020.
Coming forward to Commerce & Cloud Services, the company offers consumers the option to avail lifestyle commerce services such as ticketing, travel, entertainment, gaming and more. It also provides software and cloud services to Enterprises, telecom companies, and digital and FinTech platforms to track and enhance customer engagement, and so on.
How does Paytm make money?
The company segregates its revenue under two revenue lines,
(i) Payment and Financial Services, and
(ii) Commerce and Cloud Services.
Paytm earns the transaction charge i.e. merchant fee based on % of Gross Merchant Volume (GMV) and consumer convenience fees and subscription fees i.e. charging merchants for certain products and services, such as Paytm Soundbox and POS. Under the financial services, revenue depends on the types of services offered such as lending, insurance and wealth management. In FY21, payment and financial services contributed 75% of the revenue. Moving on, for commerce and cloud services, it generates revenues by charging merchants a transaction fee, and/or consumers a convenience fee for travel, entertainment and ticketing, and other commerce businesses. It charges its merchants a subscription fee, and in some instances a fee linked to the volume of activity on its platforms. Also, it does brand marketing campaigns for merchants, charge them depending on the scale and type of campaign.
Digital payments are expected to more than double from US$ 20 trillion in FY 2021 to US$ 40-50 trillion by FY 2026 driven by growth in: Mobile payments, increasing digital payment adoption by merchants, digital payments being accepted by non-traditional merchants along with the increasing penetration of digital banking products. Retail Credit market is expected to grow by 13% CAGR to reach US$ 1 trillion by FY 2026 whereas the MSME lending is set to become approximately US$ 600 billion opportunity by FY 2026. Another great opportunity lies in the insurance industry whereby total insurance premium to increase to US$ 228 billion by FY 2026.
One of the key drivers is the GMV i.e. as the rupee value of total payments made to merchants through transactions on its platforms. While year on year GMV has been growing consistently, its commerce GMV declined in FY 2021 primarily due to disruptions to its partners in travel, entertainment and e-commerce industries.
According to RedSeer, Paytm is the largest payments platform in India with a GMV of Rs 4,033 billion in FY2021. They have an overall mobile payments transaction volume market share of approximately 40%, and wallet payments transaction market share of 65% – 70% in India as of FY 2021. For the quarter ended March 31, 2021, Paytm Payments Bank was the largest UPI beneficiary bank with a market share of 17.1% in transaction volume.
The company’s revenue from operations saw a decline in FY21 due to a decrease in the revenue from commerce and cloud services which was offset by an increase in revenue from payment and financial services. Although its contribution margin has turned positive to 12.9% in FY21, it remains EBITDA negative.
Paytm continues to be a loss making company. However, they have narrowed their losses in FY21 owing to lower marketing expenses and lower payment processing charges. It is yet to be seen if the payment processing charges as % of GMV falls down further from here. Moreover, Paytm has experienced negative cashflow from operations in the recent past.
· The ecosystem allows to address large market opportunities
· The trusted brand, scale and reach
· The deep insights of Indian consumers and merchants
· The product and technology DNA
· Paytm has a history of net losses and may not achieve profitability in the future.
· It has done significant expansion in the recent time and the failure to manage growth effectively could seriously harm its business, results of operations, cash flows and financial condition.
· Revenue can be affected by service mix and any unfavourable changes in merchant discount rates could have a material adverse impact.
. An increase in payment processing charges to financial institutions or card networks could impact profitability as payment processing charges form ~40% of the total operating expenses.
To summarise this mega Ipo, Paytm’s mission is to bring half a billion Indians into the mainstream economy through payments, banking and financial services along with commerce and cloud services. With the largest payments platform in India and huge opportunities to cross sell products, Paytm has promising growth potential aided by under-penetration and rapidly rising financial digitalization. However, as we all know, the company continues to burn cash as it has operating losses as well as negative cash flows. Moreover, the fintech company is seeking a valuation of close to $20 billion which seems pretty expensive at present considering the operating metrics. Given the increasing volatility in the current market scenario, the rich valuations and the large issue size, only risk tolerant investors with a medium to longer time horizon and the patience to wait for the company to walk on the path of profitability may subscribe with caution to this IPO.